State foreclosure is flood control

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Gov. Arnold Schwarzenegger has been at his best when he can get out in front of a vital issue and jawbone the California parties involved into accepting a win-win compromise bypassing the paralyzingly partisan legislative process. His latest rabbit pulled from a hat was Tuesday’s voluntary agreement with the state’s four largest home mortgage servicers to help adjustable-rate borrowers avoid default and ultimate foreclosure.

Countrywide Financial Corp., GMAC Financial Services, Litton Loan Serving and HomEq Servicing handle more than one-quarter of the subprime mortgages held by California borrowers with weaker credit records. They agreed on a policy of delaying raises of low initial interest rates for borrowers who live in their homes and make timely payments, but cannot afford the higher reset rates.

This is not a dramatic across-the-board rate freeze. What the mortgage companies promise is to become considerably more open and proactive case-by-case in reaching out and offering longer-lasting low rates to California residential borrowers who showed they can afford their homes if monthly payments don’t skyrocket.

No immediate relief is offered for the shakiest subprime borrowers, who are already in default and drifting toward foreclosure. But this week’s agreement does bring a first glimmer of real hope to many thousands of California’s half-million mortgagees whose payments will climb frighteningly higher in the next two years.

The outline of a worst-case multinational mortgage/credit meltdown has already come into view, and it gives the lie to those who said there should be no taxpayer "bailout" for irresponsible subprime borrowers who should have known better. The Schwarzenegger deal is no bailout, and many who took a chance on adjustable-rate mortgages seem to have fallen prey to unscrupulous pitches that cleverly disguised how bad the numbers could turn.

The four big mortgage lenders who signed onto the California compact are already reeling from billions of dollars in foreclosure write-offs — asare many of America’s largest banks. (No. 1 Citibank has announced $18.5 billion in write-downs.)

Countrywide, the nation’s largest mortgage lender, is denying it faces bankruptcy as its stock price slumps. Fannie Mae and Freddie Mac, the federally sponsored mortgage underwriters, this month announced combined losses of $3.4 billion.

The top 10 global banks took $75 billion in write-offs from repackaged loan securities so far this year — and they are holding another $500 billion in potentially worthless paper. U.S. residential construction is at a standstill, stricter eligibility for new mortgage keeps many would-be home buyers out of the resale market and the U.S. Labor Department says 100,000 financial services jobs have already been lost.

If you think none of this affects you, take a look at what the stock market roller-coaster has done to your 401(k) retirement savings, or just check the scary amount of money your bank lost this year. This spreading mortgage/credit failure is a disaster that must be headed off. Schwarzenegger’s mortgage servicer agreement was a good step in the right direction, and many more like it will be needed to turn this around.